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The Securities and Exchange Commission filed a civil suit against Ripple Labs Inc. and two of its founders on Dec. 22, 2020, claiming it violated investor-protection laws by selling a cryptocurrency similar to bitcoin.

At issue is whether XRP, a cryptocurrency created by Ripple, should be treated as a security or just as an asset. XRP is the third largest virtual currency, with billions of dollars in daily volume.

As a security, of course, XRP would have to be registered with the SEC. Cryptocurrencies have been categorized as assets by the Internal Revenue Service, with profits and losses on sales subject to normal taxation rules. But if cryptocurrencies were to qualify as securities, their issuers would face much greater regulatory scrutiny. The SEC has sued startups over the years for selling cryptocurrencies, but the challenge to XRP’s status marks one of its highest-profile cases against a cryptocurrency creator.

Ripple created XRP (originally called “Ripple”) in 2012, then later handed over control of its development to a network of open-source developers. The company still retains about 6.4 billion XRP, with an additional 48 billion in escrow, which it sells to the public now and then. Ripple has distributed 45 billion XRP since inception. While Ripple uses XRP as part of its payments products, it represents only 1.6% of XRP’s total volume, according to the SEC, with the balance coming from secondary exchanges.

LEGAL TOKENS

The SEC’s actions did not come as a surprise, as it had telegraphed its position that XRP might be a security in the past. But the filing of the SEC’s complaint rippled (bad pun intended) throughout the industry and resulted in suspension of trading on a number of exchanges. In addition to seeing if the SEC prevails in its suit against Ripple, it also remains to be seen if the SEC decides to take steps against any cryptoexchanges that listed XRP (none of which are licensed to list or trade securities in the U.S.) for listing and trading a security.

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Author's Assets

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Anthony Tu-Sekine | Partner

As the head of Seward & Kissel’s Blockchain and Cryptocurrency Group and a frequent commentator on all things crypto, Anthony advises clients on a wide range of evolving topics, including how to structure and issue security and utility tokens, registered and unregistered offerings of security tokens, token custody, transfer and liquidity issues, non-security opinions, and investments in crypto assets by funds and other investors. A recognized leader on physical precious metals funds, Anthony represented APMEX Inc. and alternative asset manager Sprott Inc. in connection with the launch of OneGold.com, which allows investors to own gold documented on blockchain. He also:

  • Represents ShelterZoom, a leading blockchain-based SaaS contract management platform;

  • Helped form a tokenized hedge fund;

  • Provides advice in connection with ransomware payments made in cryptocurrencies; and

  • Worked with sponsors of bitcoin ETF and OTC products.

“You can work with regulators or you can really try to piss them off… If you really want to do the latter, then you should expect that they will bring every tool they have against you.”

Anthony’s thoughts on BitMEX indictment, as published in Law360 article “BitMEX Case Seen as Blessing in Disguise for Crypto Sector”